Banks discover money management again as trading declines

“It’s not hard to see the appeal of asset management,” Neel Kashkari, a former Goldman Sachs investment banker who now heads global equities at Pacific Investment Management Co., said in an interview. “But some banks have struggled in the business because of a short-term view.”

As recently as 2000, brokers, banks and insurers dominated the rankings of global asset-management firms, accounting for six of the top 10 spots based on assets, according to data from trade publication Pensions & Investments. Today, they hold four of those positions as the balance shifted to BlackRock Inc., Vanguard Group Inc. and Fidelity. The four banks and insurance companies on the list collectively have about $5.5 trillion in assets compared with more than $11 trillion for the rest.

Poor Performance

The decline reflects a combination of poor performance, the rise of mutual-fund sales through fee-only independent advisers rather than bank-owned brokerages and the impact of a mutual-fund trading scandal uncovered by then-New York Attorney General Eliot Spitzer in 2003. The inquiries into improper trading led to increased regulation, raised operating costs and resulted in more than $4 billion in penalties to firms including Bank of America Corp., Merrill Lynch & Co. and Citigroup Inc.

“Culturally, asset managers have not been a good fit within banks,” said Jay Horgen, chief financial officer of Affiliated Managers Group Inc., a Beverly, Massachusetts-based firm that holds stakes in more than two dozen money managers. “It’s a business model that requires an investment structure which recognizes value creation and operates across generations of existing and future partners, and banks just don’t have that in their tool kit.”

Citigroup got out of the money-management business in 2005 after selling its unit to Baltimore-based Legg Mason Inc., as former CEO Charles “Chuck” O. Prince changed the strategy put in place by his predecessor, Sanford “Sandy” I. Weill.

BlackRock’s Acquisitions

Merrill Lynch sold its money-management unit to BlackRock in 2006 as the bond shop founded by Laurence D. Fink diversified into stocks. BlackRock became the world’s largest asset manager three years later, when it acquired the investment unit of Barclays Plc as the London-based bank sought to bolster capital after avoiding a government bailout during the credit crisis.

The 2007-to-2009 crisis, which froze credit and led to the bankruptcy of Lehman Brothers Holdings Inc., increased pressure on banks to raise capital by selling businesses.

Credit Suisse Group AG, Switzerland’s second-biggest bank, agreed in 2008 to sell part of its traditional fund business to Aberdeen Asset Management Plc, while keeping its hedge-fund unit. The bank’s asset management division had 163.4 billion Swiss francs ($176.3 billion) in traditional investments at the end of last quarter, and 205.1 billion francs in alternative assets such as hedge funds, private equity, real estate, credit and index strategies.